Exclusive - Weidmann says not ECB's job to tackle Spain's problems

Jens Weidmann, President of German Bundesbank, answers reporter's questions during an exclusive interview with Reuters at the Bundesbank headquarters in Frankfurt, April 16, 2012.

Reuters/Kai Pfaffenbach

FRANKFURT Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes, not look to the European Central Bank to help by buying its bonds, European Central Bank policymaker Jens Weidmann told Reuters.

Weidmann, who has led a push by some policymakers from core euro zone countries for the bank to begin planning an exit from its crisis mode, said no ECB policymakers favoured using the bank's bond-buying plan to target specific interest rates on sovereign bonds, and ECB board member Benoit Coeure was simply stating a fact by saying last week that the programme still existed.

In a wide-ranging interview, Weidmann, who turns 44 on Friday, also said he saw no reason to discuss a third LTRO, the funding instrument with which the ECB has pumped over 1 trillion euros into financial markets since late last year.

Weidmann, who is head of Germany's Bundesbank, which gives him a powerful voice on the ECB's 23-man Governing Council, spoke to Reuters against a backdrop of growing tensions in Spain, where benchmark sovereign bond yields are near the closely watched 6 percent level.

"We shouldn't always proclaim the end of the world if a country's long-term interest rates temporarily go above 6 percent," he said.

"That is also a spur for policymakers in the countries concerned to do their homework and to win back (market) confidence through the pursuit of the reform path."

A rise in Spain's bond yields above 6 percent has raised concerns about a march up to 7 percent, a level beyond which debt-servicing costs are widely deemed unsustainable.

The ECB left its SMP bond-buying programme unused for the fifth week in a row last week, but Coeure, who is in charge of running the plan, fed market expectations that the bank could reactivate it when he said it was still in place.

"The limits of the SMP have become apparent," Weidmann said. "At the same time, the programme has not been ended by the ECB Council. Benoit Coeure described that."

"I don't think you will find any colleague (on the ECB Council) who is of the view that the Eurosystem (of euro zone central banks) is there to ensure a particular interest rate level for a particular country."

ECB bond buying could relieve some of the pressure on Spain's yields, but using the plan last year caused deep internal divisions and prompted Weidmann's predecessor and another German policymaker to quit.

The central bank's intervention last year in Italy's debt markets succeeded in sending Italian yields lower, but the ECB was frustrated with Silvio Berlusconi's government for not passing reforms in return, as the ECB had pressed it to do.

Some investors are betting that the rise in Spanish borrowing costs will force the ECB to dust off its bond-buying programme, but Weidmann suggested countries should not be looking to the central bank for such help.

"It is not our job to provide financial aid in order to extend necessary adjustments over time," Weidmann said. "That is exactly what the bailout fund is for."

SARKOZY REBUFF

French President Nicolas Sarkozy, who is currently campaigning for re-election, demanded earlier this week that the ECB be given a bigger role in driving growth.

Weidmann responded to Sarkozy's call by saying the best contribution the ECB could make to growth was to deliver stable prices, in line with the bank's existing mandate.

"It fills me with concern that a softening of the mandate is being discussed," Weidmann added. "A fundamental discussion about changing the mandate can definitely have effects on inflation expectations."

Sarkozy said giving the ECB a pro-growth role would not require modifying European treaties or throw the bank's independence into question, but his call for a debate on the issue has raised hackles in Berlin.

Weidmann said the LTROs the ECB deployed in December and February had helped calm markets temporarily, but he added: "With this painkiller comes a dependency, however."

"Shortly after the last three-year tender, the calls for the third or fourth round are already becoming loud, and the necessary reforms - especially in the banking system - risk being delayed."

"I see no reason for a discussion about a third LTRO," he said.

"If a bank just lives from the central bank, then clearly a sustainable business model is missing," he said. "It is up to the national authorities to restructure or wind up such banks."

Now is not the time for the ECB to exit crisis mode "but one must be ready now", added Weidmann.

ECB President Mario Draghi said earlier this month that talk of preparing an exit strategy was premature, and added: "I think the president of the ECB is the one who has the last word on this."

"VERY EXPANSIONARY"

In addition to cutting interest rates to a record low of 1 percent, the ECB has used its bond-buying programme and the LTROs to fight the euro zone crisis, as well as loosening the collateral requirements for tapping central bank funding.

"Our monetary policy is very expansionary," said Weidmann, adding that although oil prices had pushed up inflation rates, there was no sign of this feeding into second-round effects, where supply-related cost increases begin to have an impact on wage demands and other prices.

"We project inflation rates to fall below 2 percent in 2013," he said. "So there are upside risks to our forecasts, but as it stands right now this is in itself no reason to raise interest rates. But again, we deliberate on our monetary policy decisions in the Council, and I don't prejudge these discussions."

He played down talk of tension between the German central bank and the ECB and denied that he was a permanent naysayer on the ECB Council: "That I am definitely not. For me it is about defining clearly what a central bank can do and what financial policy should do, and to respect these limits."

"There have to be voices who identify the limits of what a central bank can do."

Turning to the future of the euro zone, Weidmann said it was absurd to talk about a break-up of the bloc.

"Nobody can definitively rule out that a single country leaves the currency union, but that is a hypothetical case."